Here is my annual recap of the major trends that shaped the Surface Transportation industry during the past year. After a booming first three quarters of 2018, the trucking industry contracted in the fourth quarter; by mid-April of 2019, it became apparent that the trucking industry was in a “freight recession.”
The recession had consequences.
November 25, 2019
by Dan Goodwill
Here is my annual recap of the major trends that shaped the Surface Transportation industry during the past year.
1. The Reboot – The Trucking Industry goes into a Freight Recession in 2019
After a booming first three quarters of 2018, the trucking industry contracted in the fourth quarter; by mid-April of 2019, it became apparent (https://www.barrons.com/articles/trucking-industry-is-in-a-recession-will-economy-follow-51565880739) that the trucking industry was in a “freight recession.” In a “strange inversion of market dynamics,” truckload rates dipped below intermodal rates in some lanes. By mid-year, the Cass Freight Shipper Expenditure Index turned negative year / year signaling that shippers were paying less for freight and moving fewer loads than the previous year.
The correction was a result of several factors. Slower industrial production was evidenced by the dip below 50 in the ISM Production Index. Trade tensions and tariff wars with China reduced demand. On the supply side, many truckers added to their fleets to address the capacity shortages in 2018. This coupled with higher pay to attract drivers and increasing insurance costs, drove up expenses as freight rates were falling. Softening demand, coupled with excess capacity, produced the Freight Recession of 2019.
The recession had consequences. According to Donald Broughton, principal of Broughton Capital, 640 freight companies closed their doors in the first half of 2019. On average, these companies each had about 30 drivers, resulting in 20,075 trucks being pulled off the road. For all of 2018, 310 trucking companies closed, Broughton said.
Large truckload carriers reduced their overall number of trucks in the third quarter, but not enough to affect the current oversupply of truckload capacity. Some experts now believe that demand and supply will not come back into balance until the second half of 2020.
2. Freight Matching Services come of Age
While traditional freight brokers continue to make investments in IT to improve their platforms, another group of companies is taking their IT infrastructure to a new level. In today’s world of same day, next day, and two-hour delivery, the need for a quick and more efficient way to connect carriers with shippers and brokers is becoming more urgent. That’s why many freight brokers are staking a claim on how they stand out from the competition in their digital freight matching platforms.
The carriers start by setting up a profile with their list of preferences in their preferred digital freight matching mobile app. They select their preferred lanes, their trucks’ capabilities and other additional certifications (hazmat, over-sized, etc.); loads come through as an alert on their phones. Drivers can choose to accept a load if the price, location, haul, and timing are right for them.
Shippers post their loads in the freight matching platform, identifying the key shipment characteristics – – – lanes, product description, type of freight, pickup and delivery requirements, weight, dry, reefer, heated, oversize etc.
A good digital freight matching program should be able to provide digital messaging and paperwork like invoices, contracts, etc., connect partners seamlessly, have a quick-pay solution, provide predictive matching so drivers stay loaded, auto-match capacity to load for brokers and integrate into a transportation management system (TMS) or on any mobile device.
The larger incumbent brokers are adding value, differentiating their capabilities to manage a different scale of shipper freight volume than the startups. Phoenix-based GlobalTranz, for example, has begun offering a digital freight matching platform based on extensive shipper, carrier, driver, and employee behavioral data. The platform, called GTZamp (automated movement planning), focuses on turning that data into a specific set of insights: notably, to sequence multiple loads for a carrier, to predict the cost of capacity, and to forecast when capacity will be available.
3. Amazon is the Leader in the “Delivery Economy”
Project 44, a Chicago-based firm, surveyed more than 750 consumers and 500 marketing executives and found that changing service expectations are helping to usher in the “delivery economy,” in which customers expect low-cost, fast, and “highly transparent” delivery of goods. Key findings show that a failure to deliver on time hurts a company’s reputation and that consumer expectations are quickly translating to the business-to-business world. “With the rapidly growing use of on-demand delivery apps and same-day delivery services, customers aren’t just buying a product, they’re buying an entire experience,” according to Jeff McCandless, project44’s founder and CEO. “The delivery economy is here to stay and will continue to have a vast influence on B2C and B2B expectations in the short- and long-term.”
This was a remarkable year for Amazon, the leader in this space. The company became the world’s largest global logistics provider with $42.7 billion US in third-party logistics revenue, less than 20 percent of the Seattle-based firm’s entire 2018 revenue of $232 billion, according to Pittsburgh-based research and consulting firm SJ Consulting Group. Much of this revenue comes from the fulfillment and distribution of products it performs on behalf of its third-party clients.
Amazon is moving openly into the US freight brokerage market, offering truckload services to US-based shippers on a limited number of lanes with origin points in five northeastern and mid-Atlantic states. Amazon’s move into brokerage isn’t likely to have a major impact on the established truck freight brokers such as C.H. Robinson Worldwide, Echo Global Logistics, or XPO Logistics, in the short term. But it puts those companies, along with thousands of small freight brokerages, on notice that a new logistics era is here and another big freight broker with domestic and international reach, is muscling into this club.
If that wasn’t enough, Amazon added a new perk to its popular Prime membership program: free grocery delivery. The company announced that it will start delivering grocery products within a two-hour window to all Prime members living in the 2,000 regions eligible for the service. That means Prime members, who pay $119 per year in the U.S. for free shipping and other benefits will now also be able to get free grocery shipments for products ranging from fresh meats and veggies to snacks. Until now, Prime members had to pay an additional $14.99 per month to get access to Amazon Fresh, a separate program that offered free two-hour grocery delivery.
4. Logistics Gets a Seat at the Table
Last year was a major “wakeup call” for many shippers. Capacity shortages created service disruptions and impacted bottom lines. That is producing a big shift in the trucking and transportation industry. There is immense pressure at the board and public market level for answers to two questions: “Will our supply chain respond to future capacity shortfalls?” and “What’s our logistics strategy?” This will likely give supply chain and logistics executives a seat at the table.
Transportation is moving from a reactive mode to a proactive and strategic mode. There are also several emerging developments that are driving this shift: new technology, greater visibility into the supply chain, and changing best practices. Businesses understand they need a strong supply chain strategy to compete in an Amazon 2-day, same-day or 2-hour delivery world — both from a logistics point of view, and from a customer expectation point of view.
Historically, transportation has been a very tactical or operational activity, namely get the freight off the dock and deliver it claims free, on time. After the painful lessons of 2018, every shipper must now refine their supply chains, so they strike the right balance between strategic, tactical and operational concerns.
5. The Emergence of Freight Exchanges
In 2018 it was challenging to find consistent capacity at a reasonable price; this year the challenge has been to find capacity at affordable rates and not overpay for it. Shippers concerned about volatility in US truckload rates have two new options to hedge risk in the form of exchanges, also known as “futures” and “forward markets.” But each comes with risks of their own, from losing money to collapsing altogether, most commonly because of a lack of liquidity or loss of confidence in the data.
Pricing data that once may have been tightly guarded as proprietary information is now easily accessible on DAT Rateview, Freight- Waves SONAR, J.B. Hunt 360, Freightquote, and digital brokers such as Uber Freight, Convoy, Loadsmart, and Transfix, bringing a previously unthinkable level of rate transparency for shippers and lowering the educational bar to entry. While successful futures markets have been established in everything from electricity to pork, the track record of futures in shipping has been spotty at best. In the early 2000s, a group of financial institutions created a container freight derivatives contract based on the Shanghai Containerized Freight Index (SCFI), a measure of spot rates on trades to and from China. The contract never gained traction and adequate liquidity was never maintained, so the market went dormant. Among the reasons cited for the failure was a lack of willingness to participate on the part of industry players. A narrower focus on US domestic truckload on a small number of lanes might overcome those hurdles. The Nodal Exchange will trade derivatives using dry-van rates on some major lanes.
Trucking futures don’t alter the way goods are moved. Transportation executives will conduct a bid process and tender freight in the same way they would otherwise. Futures contracts are educated wagers on future prices based on speculation like a stock. “This is a tool to mitigate some of the upward and downward spikes,” said Craig Fuller, CEO of FreightWaves.
6. Changing the “Shipper of Choice” Paradigm
Shipper of Choice became an important catch phrase in 2018 as many companies needed to adjust their shipping processes to secure capacity from quality carriers. The attributes of a “Shipper of Choice” had to adjust to the realities of 2019 and beyond. There are several forces at play.
The chronic driver shortage remains in effect. Shippers need to continue to improve efficiencies in their supply chains. Tighter service and delivery windows (see Amazon’s 2-hour grocery delivery initiative above) place more pressure on shippers to change outmoded freight management processes. Then there is technology and data which allow superior shippers to improve visibility and planning. Companies that want consistent access to capacity need to analyze data coming from their carriers and loading docks, then make the operational changes necessary to attract superior carrier partners.
7. Effective use of Technology can Improve Pricing and Profitability
Shippers with procurement strategies that rely solely on an annual RFP and an associated static routing guide can continue to achieve great rates on paper. But when the market shifts — as it did in the summer of 2018 — their transportation budgets and routing guides can become obsolete. Technology and data are changing the nature of freight rate pricing. These new pricing methodologies have benefits for shippers and carriers.
Dimensioners — machines that measure a shipment’s size, height, width, and weight — are reshaping the LTL sector, and have been since the end of the recession and the LTL rate war of 2008-2009. At that time, many LTL carriers offered discounts off contract rates as high as 90 percent just to fill trailers. Those rate wars led to billions of dollars in losses at leading LTL carriers, and a widespread contraction and reconfiguration of terminal networks. Carriers are using the technology to capture the full cost of freight and price accordingly, often repricing freight after it’s scanned at LTL terminals. “Shippers need to embrace these machines, so they eliminate dimension charges by improving the cube of their shipments,” stated Satish Jindel, president of SJ Consulting.
Technology is also helping LTL carriers become major players in the e-commerce marketplace. “Retail once was a very low percentage of LTL freight, the least attractive,” Jindel said. “Now it’s the fastest-growing sector.” One example of this evolution is a partnership between Estes Express Line, the largest privately-owned LTL carrier, and transportation management software provider Kuebix. Using Kuebix’s Fleet- MAX platform, Estes is able to act as a “fourth-party” logistics provider, matching space on brokered capacity with shipper customers’ freight, filling backhauls.
Instant and transparent data is changing the trucking industry in other ways. Dynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing is a pricing strategy in which businesses set flexible prices for products or service based on current market demands. Businesses are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market. Dynamic pricing is a common practice in several industries such as air travel and hotel rooms.
It is a good fit for the freight transportation industry since there are lane imbalances, time of the day, truck capacity and other variables that change on an ongoing basis. Dynamic pricing technology allows shippers to get real-time, market-rate pricing in their routing guides — and predict when the cost of a specific lane will go down. It also allows carriers to get market prices and bid on loads.
8. Climate Change
This item had a massive impact on the freight transportation industry in 2019. Forest fires, hurricanes, heavy rain, drought and other weather-related events affected many parts of North America in 2019. Over the past 15 years, we have seen an increasing number of intense weather-related events. Severe weather not only impacts truck drivers’ ability to complete jobs safely and on time; it also impacts the availability and timing of the goods they carry (e.g., produce).
The lack of political will and consumer indifference allow this issue to continue destroy our planet. Climate change must be addressed effectively by our political leaders.
9. Transportation Management Systems Now Available for all Sizes of Shippers
A decade ago, a transportation management system (TMS) was largely prohibitively expensive for all but the largest shippers with the biggest IT budgets, but the last 10 years have seen an explosion of such systems across price ranges and levels of robustness. That proliferation has coincided with the rise of the so-called freemium model, whereby browser based software providers offer two versions of a system: one free or low-cost version designed to gain traction from buyers and induce them to eventually pay for a second, premium version designed to drive revenue for the vendor and provide higher value for the user.
The most prominent, from a shipper perspective are likely Chicago-based AscendTMS and Boston-based Kuebix. Some freight brokers also offer a free TMS to shippers, but as ARC Advisory Group supply chain analyst Chris Cunnane wrote in a 2017 blog on the topic, “In these solutions, the route guide is populated with carriers the broker has a relationship with, and the broker makes their money based on the spread between what shippers pay for the shipment and what the broker pays the carrier.” In other words, a free TMS offered by a logistics service provider may make determinations based on what is in the best interests of the provider and not the shipper.
10. The Ongoing Driver Shortage
In 2019, the US shortage spiked from 10,000 to 60,800, according to the American Trucking Association. A recent Bloomberg article forecasts that the current shortage will double. The ATA forecasts a further spike to 160,000 over the next decade. Short term, the solutions are improving trucking efficiencies to reduce costs and improving wages to attract and retain drivers. Longer term, technology, in the form of driverless trucks will ease the number of drivers required.
It was a bumpy ride in 2019. With Impeachment hearings, the possible ratification of the USMCA deal, a possible US – China trade deal and a US election on the horizon, it will be a interesting journey over the next 12 months.
To stay up to date on Best Practices in Freight Management, follow me on Twitter @DanGoodwill, join the Freight Management Best Practices group on LinkedIn and subscribe to Dan’s Transportation Newspaper (http://paper.li/DanGoodwill/1342211466).
Dan Goodwill, President, Dan Goodwill & Associates Inc. has over 30 years of experience in the logistics and transportation industries in both Canada and the United States. Dan has held executive level positions in the industry including President of Yellow Transportation’s Canada division, President of Clarke Logistics (Canada’s largest Intermodal Marketing Company), General Manager of the Railfast division of TNT and Vice President, Sales & Marketing, TNT Overland Express.
Goodwill is currently a consultant to manufacturers and distributors, helping them improve their transportation processes and save millions of dollars in freight spend. Mr. Goodwill also provides consulting services to investors, vendors to the trucking industry, transportation and logistics organizations. All posts by Dan Goodwill